Who Has to File an FBAR? The $10,000 Rule, Explained Without the Jargon

I hear this more than you would think: "I only had a little checking account in Germany. Nobody told me I had to report it." Nobody did. That is the problem with the FBAR. It is one of the most heavily penalized filing obligations in federal law, and almost nobody learns about it until they are already behind.

The FBAR is the Report of Foreign Bank and Financial Accounts, filed on FinCEN Form 114. It is not a tax return. It does not compute tax. It is a disclosure report required by the Bank Secrecy Act at 31 U.S.C. 5314, and the details live in a Treasury regulation, 31 CFR 1010.350. The IRS enforces it, but you file it with FinCEN, not with the IRS.

Here is the rule, piece by piece.

Step one: are you a United States person?

The regulation applies to every "United States person" with a financial interest in, or signature or other authority over, a financial account in a foreign country. The definition of a United States person, in 31 CFR 1010.350(b), covers three groups:

• U.S. citizens, wherever they live. A dual citizen who has never set foot in the United States is still a U.S. citizen for this purpose.
• U.S. residents, which the regulation defines by reference to the tax residency rules in 26 U.S.C. 7701(b). Green card holders and people who meet the substantial presence test are in.
• Entities created or organized in the United States or under its laws, including corporations, partnerships, LLCs, trusts and estates.

FinCEN's filing instructions add a point that catches families off guard: minor children are United States persons too. A child with a foreign account over the threshold has an FBAR obligation. Generally the child is responsible for filing, and if the child cannot file for any reason, such as age, the parent or guardian must file it for the child.

Step two: do you have a financial interest or signature authority?

There are two ways to be connected to an account, and either one counts.

Financial interest. You have a financial interest in an account if you are the owner of record or hold legal title, whether the account is for your benefit or someone else's. Under 31 CFR 1010.350(e), you also have a financial interest in accounts held by an agent or nominee on your behalf, and in accounts held by a corporation or partnership in which you own more than 50 percent of the voting power or value. Certain trust relationships count too, including a trust in which you have a present beneficial interest in more than 50 percent of the assets.

Signature or other authority. This is the authority of an individual, alone or with someone else, to control the disposition of assets in the account by direct communication with the financial institution. You do not need to own a dollar of the money. If you can tell the bank to move it, you have signature authority. That is how employees, officers and adult children helping elderly parents end up with filing obligations. I cover that situation in detail in the guide to signature authority.

Step three: is it a foreign financial account?

The regulation reaches more than bank accounts. Under 31 CFR 1010.350(c), reportable accounts include:

• Bank accounts: savings, checking, time deposits and any other account with a person in the business of banking.
• Securities accounts: brokerage and custody accounts with a person in the business of buying, selling, holding or trading securities.
• Other financial accounts, including insurance or annuity policies with a cash value, certain futures and options accounts, and mutual funds or similar pooled funds that issue shares to the general public with a regular net asset value and regular redemptions.

The location of the account is what matters, not the currency and not the bank's brand. A U.S. dollar account at a bank branch in Singapore is a foreign account.

The regulation also carves out certain accounts. Accounts of certain government entities, accounts with certain international financial institutions, accounts at U.S. military banking facilities and correspondent or nostro accounts used for bank settlements are excluded. Participants and beneficiaries of retirement plans described in the regulation, and owners and beneficiaries of IRAs, do not file for foreign accounts held by those plans. That exception is written for U.S. tax-qualified plans and IRAs. Do not assume it covers a pension plan sponsored by your foreign employer.

Step four: the $10,000 aggregate test

This is the part people get wrong. The threshold is not $10,000 per account, and it is not $10,000 at year end. The IRS describes it this way: you file if the aggregate value of your foreign financial accounts exceeded $10,000 at any time during the calendar year.

So you add up the maximum value of each account during the year. If the total is more than $10,000, every account goes on the report, including the one with $40 in it.

A quick example. You keep a checking account in London that peaked at the equivalent of $6,000 in March and a savings account in Lisbon that peaked at $5,000 in November. Neither account ever crossed $10,000 by itself, and they never held $11,000 on the same day. You still file, because the sum of the maximum values is $11,000.

How do you value an account? FinCEN's instructions say the maximum value is a reasonable approximation of the greatest value of currency or assets in the account during the year, and periodic statements may be relied on if they fairly reflect the maximum. You convert foreign currency to U.S. dollars using the Treasury exchange rate for the last day of the calendar year, and you round up to the next whole dollar. If the value turns out to be negative, you enter zero.

What the FBAR is not

Three misconceptions cause most of the trouble I see.

First, the FBAR is not filed with your tax return. The IRS states it plainly: you file the FBAR electronically through FinCEN's BSA E-Filing System, not with your federal tax return. Your preparer may never see it unless you bring it up.

Second, the FBAR is not the same as Form 8938. Form 8938 is a separate, IRS form under the FATCA rules, with different thresholds and different penalties. Many people abroad must file both. See FBAR vs. Form 8938 for a side by side comparison.

Third, owing no tax does not excuse the FBAR. A person who lives abroad and owes nothing to the IRS after the foreign earned income exclusion can still have a large FBAR penalty exposure. The report is about disclosure, not tax.

Deadlines and records

The FBAR is due April 15 following the calendar year being reported, with an automatic extension to October 15. You do not need to request the extension. The details, including what happens if you miss October 15, are in the FBAR deadline guide.

Keep your records. The IRS says you generally must keep the required records for five years from the due date of the FBAR. That means the name on the account, the account number, the name and address of the institution, the type of account and the maximum value during the year.

Special situations

Twenty-five or more accounts. If you have a financial interest in or signature authority over 25 or more foreign accounts, the regulation lets you report only the number of accounts and certain basic information, and provide the details if FinCEN or the IRS asks.

Married couples. One spouse can sometimes file for both, but only when every account the other spouse must report is jointly owned and the couple completes Form 114a. The conditions are strict. Read the joint account guide before you rely on it.

Entities. A U.S. company with foreign accounts files its own FBAR. A person who owns more than 50 percent of that company also has a financial interest in the company's foreign accounts and reports them too.

If you are already behind

Here is the part most people miss. The FBAR penalty statute, 31 U.S.C. 5321(a)(5), treats willful and non-willful failures very differently, and it contains a reasonable cause exception for non-willful violations when the account balance was properly reported. How you come forward, and what you say when you do, shapes which side of that line you land on.

If you have missed years, read your options for late FBARs before you file anything. The answer is usually manageable. The nightmare in your head is almost always worse than the actual numbers.

Knowledge is protection. If you want to talk it through, let's talk.